Capital Markets

January 2025 Forecast

Total returns set to improve in 2025

Total returns from private real estate investments will improve compared to last year, as income return is supported by a resumption of capital growth. Increases in rental values will be the main driver for capital value growth, but some yield compression is possible, especially in sub-sectors where investor demand is stronger.

Mid-year review

• A strong fourth quarter led to a 7.7% total return for UK real estate in 2024 according to the CBRE UK Monthly Index. While this set a challenging target to beat, all property total returns to June were 4.2%, putting the UK market on track to record 8%+ total returns this year, despite headwinds in the first half of 2025.
• Income returns continue to be the main driver of total returns, but performance across the retail, office, and industrial sectors has been boosted by capital growth. Capital values at an all-property level have risen 1.4% in H1, driven by rental values rising 1.6% in this period. In contrast, property yields have been largely unchanged – with little scope for compression if long-term bond yields stay at their current levels, while Government proposals to amend leasing practices might also weigh on pricing.

January 2025 Forecast

Investment activity to increase gradually this year

There are signs that more capital will flow to UK real estate in 2025. Some investors are well-positioned to act on the market reaching a trough, but others will proceed cautiously until more certainty around pricing emerges. Hence, we expect real estate investment activity to increase only gradually as the market continues to normalise.

Mid-year review

• Real estate investment volumes in H1 2025 have fallen when compared with H1 last year. While transaction volumes in Q1 and Q2 2025 were not expected to reach the levels we saw in Q4, activity slowed because of uncertainty around economic prospects, which also impacted UK bond yields. Investors have been cautious in the deployment of capital, but more deals are now coming to fruition, and so we expect higher investment volumes in H2 2025.
• We continue to see mergers and acquisitions in the UK listed real estate sector. This reflects the persistence of large discounts to net asset value in stock market pricing for some firms. Activity has centred on REITs that own logistics, retail, and operational real estate. Yet, the office sector stands out as having seen a stronger rebound in private real estate transactions so far this year.

January 2025 Forecast

Lending to rise as leverage becomes more attractive

We expect real estate lending to increase in 2025 and demand for loans to be split more evenly between finance for new acquisitions and refinance of existing loans. This will be facilitated by falls in debt costs that will make leverage more attractive for new real estate investments.

Mid-year review

• Lenders have maintained their appetite to deploy capital into real estate, despite economic headwinds. 78% of lenders expect to increase originations in 2025 according to our European Lender Intentions Survey published in June. Refinancing will remain the main source of demand for loans as the transactional market continues to recover. While lenders still prefer the living and logistics sectors, sentiment towards prime assets across most sectors has improved relative to 2024.
• Debt costs for new real estate loans have fallen year-on-year, but only moderately as there has been no sustained downward movement in key benchmark rates such as the UK five-year swap rate. The principal driver of lower debt costs has been a reduction in lender margins as the debt market becomes increasingly liquid and competitive.

Figure 3: Drivers of UK all property capital value change

Figure 4: UK all property prime yield vs five-year swap rate